When we take over management from another agency or from a landlord who has been self-managing, the No 1 biggest thing I find is properties are being under-rented. Some are from as little as $20 per week, but others as much as $150 per week. Whooza!
So how can this happen? Simply, the rent has not kept up with the market. A good tenant has been in place. They’ve stayed for years, and either the owner has said ‘oh they are good tenants, I don’t want to upset them’ or ‘I don’t want them to leave so I will keep the rent low.’ What’s worse is if the property manager has said let’s increase the rent by $5 or $10 when it really should have been increased by $40.
Landlords need to think this through. They own an investment property for investment. Investors generally want to maximise their return, and keeping the rent close to market value is part of that. Can you imagine an investor who owns Apple Shares say oh no keep my dividends cause I like Apple and Apple products?
I’ve had a client that did just that. He used to keep the rent significantly low just because he liked the tenant. Then they wanted to sell. Because the rent was low and the tenant was in a lease, they could only sell to an investor. So due to that, they had to sell for considerably less. The landlord thought they were doing the right thing with lower rent, but ultimately it cost them tens of thousands of dollars in the sale price of the property. The winners were the tenant and the buyer. The landlord lost. Big time.
So, please don’t make the same mistake as theirs. In fact, get to know whether your property is under-rented or not. If your property is under-rented, there are chances you will face a huge loss while selling the property.
And, if your property is under-rented, what should you do, and what is the right procedure to increase the rent?
In this article, you can get answers to all these questions. Continue reading to find out how often you need to increase the rent.
So how do you know if your property is being under rented?
To know the answer to this question, you must check a few things, such as your last rental increase, do comparable market analysis, look at your competitor and see the market rate, etc.
Given below are some things you must take into account if you want to know if your investment property is under rented. You will learn about what to do if you are getting low rent for your property.
When was the last rental increase?
The very first thing to consider is the last rental increase of the property if you want to know whether your property is being under rented or not.
Start by looking at when the last rental increase happened and how much was that increase. If you have not had an increase for some years, then that’s alarm bells for you. If this is the situation, there are chances that your property is being significantly underrated. I should say we do have properties where we also have not had increased for some time, but the have validated those by checking the market. Regular increases are really important to build wealth.
How much was your last rental increase?
The next thing to consider is the last rental increase. If your last few increases were $5 to $10, then it’s also every possible your rent is now under market. We do $10 increase and something we do no increase, but usually, the following year is then a catch up with a $20 a week rental increase.
Look at the competition
The next thing you should do is to check your competition. If you go online and look for other properties for rent now that are comparable to yours, this will give you an indication of what is possible. Keep in mind the advertised rent of a property may not be the final rent the property achieves. So you could even look through leased properties and call the property manage to see what it leased for.
You need to realise that you need to compare Apples for Apples. A property might be renting for more but it may have stone benchtops, ducted air conditioning units, fans and fly screens and maybe even a fresh coat of paint. Compared to a similar property that is in the same area, same age, same size house and land that had none of that. This will give an idea of whether your tenants are paying the right rent or not.
Does Asset Agents always increase rent?
No, it is not the case. It is not always that Asset Agent increases rent.
When a lease is due, we do market research on what the current rent should be and adjust it accordingly. Sometimes no increase is warranted, so we have no choice but to leave it. But it’s then possible the next time the lease is due for an increase may be bigger than expected.
We take lease renewals seriously and don’t just guess a figure, it takes us time to review and more than one person is involved so the figures can be cross-checked.
Comparable Market Analysis
Ask your property manager to do a CMA, which is a report that should show you other properties in the area similar to yours and what these were advertised & leased for. Agencies subscribe to RP Data or Price Finder that get behind the scene information of days on market and final rental price of most advertised properties.
We recently took on management from a landlord who self-managed. We did a CMA and, in the same complex, a property rented for $450 PW, another for $480 PW. So we thought let’s start at $495 PW and adjust. With lots of interest and tenant applications, we now have secured a great tenant on a 12-month lease and slightly higher than other properties in the complex. The landlord is very happy. We strive to give all our customers the same satisfaction and happiness by pushing rental prices when we can.
Get a second opinion & not from your mum.
If you are not sure if you are getting the right amount of rent, get a second opinion. Make sure you consult a reputed agency or property manager.
Or, contact us, and we do a comparable market analysis for you.
We do this a lot. There are many landlords who self manage the property or are with another agency. We offer them a free remote rental CMA. This allows them to compare their current rent, to what we believe is now achievable. We do this remotely without attending the property or disturbing the tenant. Unless of course the landlords would prefer we attend the property, which is always preferred by us.
With this, often we find the rent is low and the landlord is not getting the maximise rent for their property, and they can do a lot better. After all, what investor doesn’t wants to earn the maximise return possible. With Asset Agents, rest assured we really care about ensuring all our investors get the maximise rental return.
When to increase the rent
If you want to increase the rent of your investment property, you need to give some notice to your current tenant.
Also, you can’t increase the rent while the tenants are protected by a current lease unless that increase is written into the lease when it was signed. So it’s best if you do an increase at the end of every lease.
It is also better to do small yearly increases than leave it for two years and then do a bigger one. That’s what we call bill shock, which my wife gets every month she gets my credit card bill.
How to approach a tenant with a larger increase
I’ve had tenants’ rent increased by $50 per week. When I need to do this, I meet with them and discuss it. I show them what value they have been getting over the past few years because they have had no increase. I show them what else is available if they chose to leave and what they would need to pay. Most tenants realise, yes, if they left, they could not find the same for less, so if you handle the situation correctly, the tenant will often stay.
Best time for really large increase
So, the next question is, when is the best time to make a large increase in the rent? There is no hard and fast rule to decide what the right time to increase the rent is. However, I think the best time to increase the rent is while changing tenants.
I recently had a tenant vacate that was paying just $380 PW. We’ve now increased the rent to $450 PW. We’ve had loads of tenants who are interested in our property and tenant applications too. So, big increases like this are best to do when changing tenants, as new tenants see the real value, with what else is on the market at that time.
The cost of not increasing your rent
What’s the cost to you as an investor if you don’t increase the rent?
Let’s take an example. Some years back we took over a property that was rented for $375 PW. Then we increased it to $440, then $475, then $500, then $550 and it’s now $560. The landlord is now enjoying an additional $185 per week of income. Over the next 3 years, that’s an additional $28,860 they will be earning. Now that increase didn’t happen straight away, it happened over a few years. At first, the property was under rented, and then we just ensured we kept up with the market with each lease renewal. What’s exciting for that landlord is that the property is now cashflow positive & they can now buy another investment property to build their portfolio.
You can only earn these profits if you keep in line with market trends and rents. If you lag behind the market, over time it will add up to thousands of lost income.
6 Month increase limitation
Did you know you cannot increase the rent if it has already been increased within the last six months? Yes, interestingly enough, rent can only be increased after a time frame of 6 months.
You can have a 6-month lease and increase it at the end. If you can have a 12 months lease and have it increase at the 6 months mark as long as that is pre-written into the lease when signed.
Bond Top Up
Realise too that every time you do an increase, your tenant’s bond is now not four week’s rent. It’s slightly less. So you need to get your tenants to top their bond up with the RTA
Rent should not be increased in an excessive manner. Any rental increase you do needs to be justified.
So, for example, you can’t increase the rent to $750 PW if all other comparable properties in the area around are renting for $600 PW. If you try to increase the rent considerably above market the tenant can take action against you to stop this from happening. So it’s important to keep within legislation when doing increases.
What if you want to increase your rent and the tenant wants to move
Some tenants just can’t afford a rental increase. So if your tenant wants to move out due to this – for instance, if the tenant is paying $550 PW but now you want to get $600 PW, and your current tenant can’t afford it – well, don’t worry. There are many new tenants, in fact, a lot of tenants out there who are willing to pay you the price you have demanded. So, just let the old tenants move out and look for new yet better tenants to rent out your property.
The small increase will amount to an additional $7,800 over a period of 3 years. It will maximise your return and protect your investment too.
What to do if you think your rent is low
Get in contact with Asset Agents and take advantage of our free remote rental appraisal. That’s a good place to start. We will start by performing a comparable market analysis to get an idea of how much you are behind in terms of rent. With us, you can rest assured that you will never be in a loss while renting out your investment property. You’ve got nothing to lose, it’s a free service. You can then take the information to your current property manager or if you self-manage make a plan with your tenant and give them notice and some increases.